No Cash for Clunkers

Princeton economist Alan Blinder recently proposed a new government program he christened “Cash for Clunkers” in an article in The Times‘s Business section.

Under the program, the government would buy back old cars at above market prices and scrap them. According to Blinder, this would accomplish a policy trifecta: 1) help the environment by getting the most polluting cars off the road; 2) stimulate the economy by getting money in the hands of people who will spend it and increase the demand for new cars; and 3) reduce income inequality by funneling the money to the poor.

I am skeptical of this proposal for a number of reasons.

This plan has the general feel of a gun buyback program, but instead of buying crappy old guns the government is buying crappy old cars.

When it comes to gun buybacks, both the theory and the data could not be clearer in showing that they don’t work. The only guns that get turned in are ones that people put little value on anyway. There is no impact on crime. On the positive side, the “cash for clunkers” program is more attractive than the gun buyback program because, as long as they are being driven, old cars pollute, whereas old guns just sit there.

Still, my guess is that unless the price the government pays for the clunkers is very high, the majority of vehicles that are turned in will not have been driven much, if at all. Indeed, I suspect one of the most visible responses to this program will be a new market for mechanics fixing up cars that don’t run at all just enough so that they can be driven to the government’s lot to collect the cash.

The biggest problem with this policy, however, is the way it distorts long run incentives. Let’s say the rules of the program say that a car must be at least fifteen years old to qualify for a big government subsidy to scrap it. This gives powerful incentives to people with twelve-year-old cars they were planning on scrapping to keep driving them for three more years to collect the government bounty. Instead of reducing the number of clunkers on the road, this program could actually lead to an increase!

It also seems to me that any effect on the demand for new cars would be extremely limited. People who drive clunkers are generally not in the market for new cars. Presumably their replacement car will be a used car. The increased demand for used cars will lead to higher prices for used cars, which will push some buyers towards a new car, but the likely impact on new cars would be small.

Finally, it is not even clear that this program would have such beneficial redistribution effects either. In the short run, it would represent a windfall profit to those who own clunkers. In the long run, however, there is a market for used cars. In response to the program, the price of nine-year-old cars would have to rise enough to offset the increased value associated with a near-clunker someday becoming a clunker that can be sold to the government. The benefits of the program will actually be spread widely over all car owners, not narrowly focused on the poor.

This program highlights some general concerns that arise with government programs. The first is that policies which might be a good idea if implemented as one time, short term programs, can be much less attractive if made permanent because of the way they distort incentives.

I suspect that even if this policy was introduced as a one time program, it would be extended because there would be a constituency for it. The second thing this program highlights is that it is extremely difficult to deal with negative externalities (in this case pollution) by subsidizing them (as this program does). If folks are doing things that we want less of, it makes a lot more sense to punish them for those behaviors (through extra taxes for instance) than to reward them.

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  1. d says:

    This may be a naive question, but if we want people to drive less but work and invest more, why wouldn’t we just increase taxes gas and energy and reduce taxes on income and capital gains a corresponding amount?

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  2. Robert says:

    Spain run a similar scheme called “Plan Renove” (renovation plan) that addressed some of your concerns.

    You could only apply when buying a new car. You handed in the old one, got the money from the gov and used it to help paying the new one.

    If I remember right they gave you $500 for a 10+ years old car.

    At least in Spain it worked quite well, as far as I am aware. We had quite an big “fleet” of old Seats, Renaults and Citroens that you don’t get to see anymore.

    I don’t know if there is any correlation or not, but now (I don’t know how it was before) the price of second hand cars in Spain is higher than in other EU countries like France and the UK.

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  3. NM says:

    Raise the tax on gas. Subsidise small, energy efficient cars. That’s what we do in Europe. It works. You won’t do it.

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  4. CH says:

    You’d think that current gas prices have done a lot to dissuade peeps from driving clunkers. If I still had my 83 Impala, I’d be all for this silly program. But the last five years of high gas prices would have been awfully painful.

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  5. econobiker says:

    Didn’t California want to go this route about 10-15 years ago?

    Another problem is who decides what is a “clunker”? Is it emissions versus body damage evaluation? And just who says the old cars are more polluting? Don’t most places have some sort of emissions programs already in place?

    As an example recent gas price increases suddenly made 10-15 year old Geo Metros worth alot more due to their miserly fuel use. How can a 15 year old car that gets 30-40 miles to the gallon be worse than a 3 year old car that gets 24 miles to the gallon?

    Another issue is when the government (local,state, federal) “suddenly” puts penalties on owning “clunkers”, the classic car folks (who usually own multiple cars- which reduces emissions overall) start to get wound up about it.

    Yes “People who drive clunkers are generally not in the market for new cars.” And usually never will be. I could also see this enabling a “grey” market for “clunkers” sourced just for the buy back as Levitt suggests.

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  6. Ken Waller says:

    General concept of program has merits. Details need to be worked out to avoid problems you cited. For example, have a sliding or pro-rated scale for the age of car, instead of wating extra 3 years on 12-year old car to junk it when 15 years old.
    If you are not aware, people are junking old cars because the price of scrap metal has gone up. If you want to encorage new purchases, how about making auto loan interest deductible. Let’s stop using home equity loans for purchasing large SUVs.
    That brings us to the subject of jobs – if there are no jobs, then any program like this will not work. If people had good jobs, they would be out there buying new cars with better gas economy.

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  7. Brian says:

    What if they just had government buyers that looked for used cars that are already on the market and purchased them. They wouldn’t need to do any marketing (in fact, they would probably want to keep the program as quiet as possible) and they would probably be able to negotiate a better price for the car (depending on the buyer of course).

    This probably wouldn’t stimulate new car sales much, but it would get some of the worst cars off the street and there are plenty of decent used vehicles out there (if the issue is pollution and gas usage).

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  8. Brad Franzwa says:

    The automotive battery programs are a good example of this. When buying a new battery, one has to turn in an old one or pay a hefty fee. The program results in fewer caustic batteries sitting behind the garage, an environmental nightmare. The automotive trade-in deal could work the same way and has the effect of getting the old clunkers off the street.

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